Children grow up fast, don’t they?!? It may be hard for some of you to believe, but my oldest daughter, Emma, is now a senior in high school! Yes- a senior!   Can you believe it? So, right now, we are going through the whole song and dance of college visits, college applications, and of course scholarship applications. Eighteen years have passed in the blink of an eye!

Now that we are on the brink of writing that big check to some college or university, its a good time to reflect on college savings plans. You may be considering utilizing a 529 College Savings Plan as a component of your college savings strategy for your own kids or grandchildren. Section 529 College Savings Plans can be an excellent tool when saving for college.  While there are many benefits when using the 529 Plan, there are also a number of drawbacks to consider.  Here are a number of frequently asked questions:

What are 529 College Savings Plans and what are their benefits?

529 plans are state-sponsored investment vehicles designed to help families pay for expenses associated with qualified K–12 expenses or college expenses. Contributions to 529 plans are not federally tax deductible but some states allow a state tax deduction.  The primary benefit is that investment earnings are not taxable as long as they are used to pay for “qualified” education expenses.

What are considered “qualified” education expenses?

Over the last several years, the laws on 529 plans have expanded to include many more qualified expenses. Generally, qualified education expenses include tuition, fees, books, supplies, equipment, room and board (with limits),  lab costs, computers, computer equipment, and internet access. It is important to note that qualified K-12 tuition expenses may not exceed $10,000 per beneficiary per year.

Is there a penalty if money is used to pay expenses other than “qualified” education expenses?

Yes.  If the money is used for a purpose other than qualified education expenses, the earnings portion of the distribution is taxed and penalized.  It is important that 529 Plans are not over-funded as the penalty for doing so can be significant.

How is money invested in these plans?

Investment options vary on a state by state basis.  However, most 529 plans provide a limited list of investment alternatives.  We generally suggest the age-based or objectives-based investment options.

Who can setup and fund a 529 Plan?

Anyone can setup a 529 plan and name anyone as a beneficiary.  There are no income restrictions nor are there annual contribution limits. However, some plans have a maximum account balance limit.

Can the “beneficiary” on a 529 Plan be changed?

Yes.  The beneficiary can be changed to a sibling or other family members.

Are 529 Plans considered when determining financial aid eligibility?

Yes.  A 529 account owned by a parent for a dependent student is considered a “parental asset” when determining the expected family contribution.   However, 529 accounts owned by grandparents, other relatives, etc. would not be considered.

Who controls these accounts?

The person establishing the account (usually the grantor) maintains the ability to make investment decisions, distribution decisions and names the beneficiary of the account.  The beneficiary (usually the child) does not have control of the 529 plan at any age, unless they are the owner of the account.

Are 529 plans the best solution for everyone?

No.  529 plans should be one component of a college savings strategy.  Each college savings strategy should be customized and based on individual circumstances and preferences.

Where can I find more information?

There are a number of online resources that can provide general information about college saving alternatives.  However, we believe that most personal financial decisions should be based on your objectives and your specific financial situation.  This is particularly true when it comes to saving for college.  There is truly no one-size-fits-all approach.  With that in mind, we would suggest that you contact our office to see how we may be able to help you.